Heavyweights Debate Self-Financing Of Digital Rollout At ShoWest

By J. Sperling Reich | April 2, 2009 8:08 pm PDT


Las Vegas is a city known for its many spectacles; bright lights, showgirls, casinos, fancy restaurants and prize fights are all just some of the attractions.  So, it should come as no surprise that ShoWest, the annual gathering of motion picture exhibitors and distributors in Las Vegas, decided to add to the city’s attractions with their own version of a prize fight.  On Wednesday, the convention held a lunchtime panel discussion titled “Show Me The Money! Does Digital Self-Financing During A Credit Crisis Offer Hope?”.  One might ordinarily expect a panel discussion on financing to be incredibly dry, though whenever you mix senior level studio executives with independent theatre owners and raise the topic of the stalled digital cinema rollout, you are bound to see some sparks fly.

No doubt the ShoWest panel was put together in the wake of Paramount Pictures’ direct-to-exhibitor virtual print fee announcement.  Indeed, Mark Christiansen, Paramount’s Executive Vice President of Operations was one of the panel members.  He was joined by Julian Levin, EVP of Digital Exhibition and Non-Theatrical Sales & Exhibition at Twentieth Century Fox, Bill Campbell, Managing Director of the Cinema Buying Group, George Solomon, Southern Theatres CEO and Andrew Sriubas, a Managing Director of JP Morgan Investment Bank.  Moderating the brouhaha was the general counsel for the National Association of Theatre Owners, G. Kendrick Macdowell.

Christiansen started off by explaining that Paramount had a lot of exhibitors asking if they could install digital cinema equipment on their own, rather than rely on integrators to do so.  Paramount was able to capitalize on their existing relationship with theatre owners to put the direct-to-exhibitor virtual print fee agreement together.  Since the 21-page document was  made public in January, the industry has been combing over it in search of any detail that might be missing.  Christiansen doesn’t think they’ll find much.

“We were able to take out all the things about guaranteed playback.  Nobody is more aware of the importance of having the picture up on the screen and maintaining equipment than an exhibitor,” he stated.  “Integrators don’t have the same incentive if screens go dark for 24 hours.  We certainly think there is a place for integrators, especially for smaller exhibitors that don’t have the expertise to install and maintain digital equipment.”

Levin, on the other hand, believes Paramount’s agreement may be a little too brief.   “We think it has a lot of holes in it,” said the Fox exec.  “Our goal is to approach this as a long term business.  We are going into business with an exhibitor for 10 years and you shouldn’t sign just a simple agreement because this isn’t a simple situation.  We believe that our approach to the agreement is a much more mature approach that allows both parties to get the benefits.”

Levin probably meant no disrespect to Christiansen and Paramount with his remarks (or maybe he did), but he referred to the direct-to-exhibitor VPF Fox was putting together as a “more mature financing agreement”.  This was the first time Fox made public that they were working on a direct-to-exhibitor VPF agreement.  For exhibitors that want to move immediately on 3D enabled systems, the studio has a one page memorandum for theatre owners to sign that will pay VPFs retroactively once the official agreement is inked.  “From our point of view you’ll be paid a VPF when the broader deal is done,” Levin explained.  “We don’t believe a 20 page document is enough.  This leaves the decision in the hands of the exhibitor.”

What is important to note is that Levin mentioned only exhibitors looking to install 3D systems, which may mean those looking to install 2D digital cinema systems would be excluded.  With James Cameron’s expensive 3D blockbuster “Avatar” due to be released by the studio at the end of 2009, Fox is surely looking to increase the number of 3D screens it can open on.  Those who have been privileged enough to see the working draft of Fox’s complete VPF report that it is 64 pages long.  “It does not interfere with the business of exhibition and distribution,” said Levin referring to the agreement.  “We did our best to try and maintain the existing relationship as much as possible.”

Levin doesn’t believe however that exhibitors should go out and finance their own digital systems if only one or two distributors are offering them VPFs.  Rather, an exhibitor will need to sign agreements with all the distributors releasing a majority of the films being played.  Christansen, sighting his studio’s willingness to tackle direct-to-exhibitor VPFs early on, agreed, “You’ll have to get some number of distributors before you can move.  But someone had to go out and get it started.  That’s the way these things work. Fox did a deal with Arts Alliance before anybody else knowing that it would require other studios to come onboard.  Somebody always has to be first.”

Christiansen said approximately 30 exhibitors have already signed Paramount’s direct-to-exhibitor VPF while according to Levin Fox has 15-20 North American exhibitors signed up to their one page memorandum and an additional 15-20 internationally.  Neither mentioned the names of specific exhibitors.

When Macdowell turned to Solomon to get an exhibitor’s opinion the discussion turned somewhat acrimonious, in a friendly sort of way.  “I happen not to be a proponent of 2K [projector resolution] and I have not been a big proponent of integrators,” said Solomon.  “I believe we should be able to band together and form our own consortium and go negotiate for our own VPFs.  I don’t believe in giving a cut to an integrator.”

CBG’s Campbell, like Christiansen, isn’t as down on integrators as Solomon and is of the opinion such third parties might be necessary, especially in the short-term.  “Self financing is not going to happen for a long time,” said Campbell.  “I think self-financing is going to be done through the integrators and if we have to pay a small fee of the VPF then so be it.”

Solomon, whose smooth New Orleans drawl had Macdowell comparing him to a slick southern lawyer, is not the retiring type and is almost always quotable.  Given the chance to air a few thoughts, he let his grievances fly.  His comments received the biggest audience reaction by far.  “If 2K is the way we’re going, then 35mm is better,” he argued.  “Apparently digital helps distribution, but it doesn’t do a thing for exhibition.  If distributors want to go with 2K then give us the money and we’ll get on with it, otherwise we’re going to have to go at our own pace.  If distribution wants 2K, give us the money!”

Solomon went on to get a huge laugh when he recounted asking one of his regional managers, “What’s the difference between a 35mm film print and a digital cinema hard drive?  He said, ‘about 40 pounds’.”

Levin attempted to diffuse Solomon by pointing out that two of the studios were present and on stage, ready to talk about giving Southern VPFs, but Solomon got the last word in during this exchange as well by snapping back “I know, but I have to figure out how I’m going to pay for [3D] glasses with one of them.”

In one instant Solomon made public the rumor that Fox had been telling North American exhibitors that after “Ice Age 3” the studio would no longer be paying for disposable 3D glasses.  Presently none of the studios pay for disposable glasses in Europe, though they have been footing the bill in the U.S., Canada and at times Mexico.

Levin then turned his attention to exhibitors in the audience, strongly suggesting they should start converting their theatres to digital as soon as possible.  “I don’t know that Twentieth Century Fox is going to be there forever to help with the financing,” he said.  “The transition is going to happen with you like it or not.  You may not get these VPFs if you’re waiting for certainty.”

This is an almost verbatim echo of Levin’s comments at ShowEast about whether Fox would continue to offer VPFs.  As well, he said nearly the same thing two years ago when announcing the studios VPF agreement with Arts Alliance Media.

The good news, according to Sriubas, is that investment banks believe they will start to see financial markets loosening up by July, though he feels it will be hard to land financing for direct-to-exhibitor VPFs with any fewer than four studios.

J. Sperling Reich